If you have a bank account or investment fund or some other type of account held outside the United States, you may need to disclose those foreign accounts to the US federal government. These foreign bank account reporting requirements are often unfamiliar to taxpayers.
We are used to the concept of reporting one’s income and deductions to calculate one’s taxes. But asset disclosures come as a surprise to many as they are not directly related to the tax calculations. However, this topic is especially important for Americans living or working abroad and for non-US citizens immigrating to the U.S., both of whom are likely to have financial assets outside of the country, and thus a requirement to file these disclosures as part of their tax return.
This article discusses:
- What needs to be reported on the Form 114 (FBAR) and Form 8938?
- What can be left off these reports?
- Who needs to file Form 114?
- Who needs to file Form 8938 with their tax return?
- What are the penalties for not reporting?
- What records need to be kept and for how long?
What Needs to be Reported?
We need to report accounts held at financial institutions located outside the United States of America.
On these reports, we include foreign financial accounts:
- That you own
- That your spouse owns (if you are married and filing jointly)
- That you jointly own with someone else
- That someone else owns if you have signature authority or a financial interest over the account
It’s not just bank accounts that have to be reported. We also need to disclose the existence of foreign brokerage accounts and mutual funds, retirement plans, life insurance policies with cash value, and annuities.
What Can be Left off These Reports?
Luckily, there are a few exceptions. None of the below have to be reported:
- Accounts held at a foreign branch of a U.S. bank
- Accounts held at a U.S. branch of a foreign bank
- Pensions (in the traditional sense) – as these are not “accounts” owned by the client.
- Foreign real estate
- Foreign social security or similar program
Who Needs to File Form 114?
If a U.S. citizen or resident alien has more than $10,000 held at any time during the year in one or more foreign financial accounts, that person will need to file Form 114, Report of Foreign Bank and Financial Accounts (FBAR).
If you file as a non-resident alien (under Form 1040NR), then you are not required to disclose these bank accounts. Consult this blog article if you are a non-US citizen and unsure whether to file as a resident or non-resident alien, or reach out to us at Visor for assistance.
Who Also Needs to File Form 8938?
Some people who file FBARs have the additional requirement of filing Form 8938, Statement of Specified Foreign Financial Assets.
Form 8938 applies to those with bank accounts with significant assets. The asset threshold varies based on whether 1) you are currently living inside or outside of the U.S. and 2) whether you file your tax return as married filing jointly, married filing separately, or single. The thresholds start at $50,000, so if you have an account that has about that much or more, then you might be subject to filing Form 8938.
Both of these factors are also not as simple as they seem. There is a precise definition that must be met to qualify as “living outside of the U.S.” Similarly, determining the account balance isn’t straightforward, as we have to look at both the highest balance reached at anytime during the year as well as the balance of the last day of the year.
Once we have those inputs, we then compare the account balances to the relevant thresholds to determine if this second disclosure requirement is necessary.
Penalties for Not Reporting Accounts on Form 114 or Form 8938
There is no tax associated with Form 114 or Form 8938. But there are significant penalties for failing to report foreign bank accounts.
- Form 114 (FBAR) penalties start at $12,459 for a non-willful failure to file a complete and correct report. If a person’s actions were willful, the penalty can be up to 50% of the account balance or $100,000, whichever is higher. Penalties can be waived if the person can show reasonable cause for the delay or inaccuracy in filing the FBAR.
- The penalty for not filing a Form 8938 by the deadline is $10,000. Additional penalties can be imposed if someone does not file a Form 8938 within 90 days of receiving a formal notice from the IRS warns that Form 8938 needs to be filed.
How Long to Keep Records
We urge clients to keep statements for each foreign financial account along with copies of the FBAR and Form 8938 for a period of at least six years from the date these reports were filed with the US government.
- If someone has a total balance of USD $10,000 or more across all their foreign financial accounts, then they need to file Form 114 with the Financial Crimes Enforcement Network.
- Account balance reporting thresholds for Form 8938 start at USD $50,000. This threshold varies based on the taxpayer’s filing status and location of residence.
- No fine for over-reporting, but serious fines for under-reporting or omitting the forms altogether. Penalties for failing to file Form 114 start at $12,459. Penalties for failing to file Form 8938 start at $10,000.
Done filing taxes alone? New clients can prepay $99 to lock in your spot!